American Oil and Gas Reporter - August 2015 - 37

MARKETMATTERS
Bearish News
Being Countered By
Bullish Signs
In mid-July, factors that had been simmering for many
months appeared to be lurching toward resolution with mostly bearish implications. Greece and Iran are being joined by China as a
focus of downward pressures on price.
The oil markets returned from an extended Independence Day
holiday to sharp declines in all petroleum liquids sectors. Crude
oil prices broke out of the six-dollar range in which they had traded since late April. West Texas Intermediate dropped $4.40 on
July 6, a loss of 7.6 percent before prices subsequently settled into
another flat period of trading.
Much of this was a reaction to long-simmering problems that
have been in the news for many months. As long-established issues, Greece, Iran and rising OPEC output in retaliation for production growth in the United States should not have induced so
large a decline.
At the same time, new elements appeared. These include an
increase in the U.S. rig count and a more bearish tone from the
investment community. Even more stunning was a collapse of the
Chinese stock market.
The Chinese equity market dropped about a third between midJune and mid-July. Efforts to stabilize prices did little to stem the
decline. An economic slowdown should lead to lower demand
growth. One observer, however, questioned the strength of the link
between the stock market and fundamentals, citing political risk
as the more dangerous for China's economic stability. He noted,
"There is a clear disconnect between economic fundamentals and
the stock market. This disconnect was just as palpable when the
market was making dramatic gains as it is in the current bearish
sentiment."
The weekly rig count produced a bearish surprise, too. For only
the second time this year, the oil drilling count moved higher. "The
U.S. rotary rig count from Baker Hughes was up one at 863 for
the week of July 10," said one analysis. "It is 1,012 rigs (54 percent) lower than last year."
This was the second increase in oil drilling since Dec. 5.
A major bank commented, "Not only did $60 a barrel oil, and
strong high-yield and energy-equity markets create an increase
in U.S. drilling last week, but the market structure of the 'new oil
order' has generated incentives for low-cost producers such as core
OPEC and Russia to ramp up production."
The bank renewed its forecast for lower oil prices.
Oil markets are cyclical. This degree of bearish news cannot
be sustained without some reaction. Some of that takes the form
of newly reduced estimates of additional production in Brazil and
Iraq.
Lower prices induce demand and a need for additional crude
oil. The International Energy Agency looked largely to Brazil and
Iraq for those supplies. Initially, those producers were expected
to add 2.0 million barrels a day to supply by 2020, and were to
add another 2.5 MMbbl/d over the next five years. IEA estimatTransactions in securities futures, commodity and index futures, and options carry a degree of risk. Past
performance may not be indicative of future results. This column is for informational purposes only. It does
not represent an investment offer, solicitation or recommendation.

" Oil markets are cyclical.

Bearish news cannot be sustained
without some reaction.

ed Brazil would be pumping 3.7 MMbbl/d by 2020; Iraq was supposed to contribute 4.6 MMbbl/d to global supply.
Since those forecasts were announced, however, events have
forced large cuts in the estimates. Petrobras has lowered its fiveyear expectations by 1.4 MMbbl/d. This reflects relatively low
prices and a continuing corruption probe of the national oil company.
Iraq reportedly is negotiating with major international producers
to set "more realistic" targets. This reflects agreements to cut spending already in the works.
Taken together, these reductions in output expectations add
to the prospect that today's supply glut turns into tomorrow's crude
oil shortage and an accompanying rally in price.
WTI prices fell to $42 early this year. Since then, they have
rallied and stutter-stepped lower. They continue to resist support
despite the spate of bearish news on which markets have focused.
Some observers think prices must inevitably fall further. They
point to Chinese demand as being unsustainable. They also note
that U.S. production is becoming more efficient. If prices have
not buckled under these pressures, traders must wonder why and,
increasingly if, lower prices are in the cards.
Range-bound trading appears to recognize dramatic gains in
demand. U.S. refineries continue to operate at high rates. New
crude oil supplies from Iran are likely to come to market slowly if sanctions on the country's oil industry are lifted. Meanwhile,
domestic gasoline demand continues to push historical highs.
Distillate fuel oil stocks in the United States continue to build,
and demand is moving lower. At the same time, however, the technical condition of the ultralow-sulfur diesel price chart is turning bullish. Prices recovered and divergence, signaling a move
higher, is starting to assert itself. A summer bottom for distillates
is a long standing feature of oil markets.
❒

ALAN H. LEVINE is chairman
and chief executive officer of
Powerhouse, a registered affiliate
of Coquest Inc., and a commodities
brokerage offering hedging services to the energy industries.
Levine has more than four
decades of experience as a petroleum specialist. He may be
reached at alan@powerhouseTL.com or 202-333-5380.
AUGUST 2015 37

American Oil and Gas Reporter - August 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - August 2015